Custodial fees are costs that you'll pay to a bank or brokerage for taking care of and managing your investments. They're sometimes also called safekeeping fees.
At some point in your investing journey, you'll likely encounter these fees. That's unless you're managing it all yourself. Learn more about what these fees mean in different contexts so you know what to expect.
What Are Custodial Fees?
When you invest in stocks, bonds, mutual funds, or become an owner of some security, the broker takes cash out of an account and pays the person or institution from whom you are making the acquisitions. Once it receives the security, it stores it for you. Unless you request a paper stock certificate or insist upon the use of the direct registration system, you will typically have the securities placed in a global custody account of some sort.
The custodian keeps the assets safe. It also collects your dividend and interest income for you, gives you an account statement, and handles any corporate actions. These could include receiving shares of a spin-off or making an election for cash or stock following a merger. The custodian also performs a host of other tasks that could become overwhelming and if you had to deal with the duties yourself.
Custodial fees pay the custodian for these services.
Custodial fees refer to any fees a qualified financial custodian charges you for its custodial services. These could include bank trust departments or registered broker-dealers.
This term has become rare. But it often refers to a service, many times by bank trust departments, for handling custody on behalf of a client who wants to keep their stock certificates on hand at the bank. It's usually in their name rather than a street name. A street name is the name of the bank, dealer, or firm that holds the stock or other assets on behalf of the owner.
When an asset is placed in safekeeping, the investor receives a receipt proving they own it. The asset does not belong to the institution holding it. Even if it went bankrupt, its creditors couldn't go after the securities; they would be returned to their rightful owner.
If the investor places a sell order, the bank trust department would hand over the stock certificate to the broker prior to the settlement date. The custodian would also add any other certificates received from spin-offs to the vault. This makes sure the investor receives their entitled share.
How Custodial Fees Work
If a person living in the U.S. owns securities but is not a member of a stock exchange, they own the securities through a chain of registration. This often involves one or more custodians. The process works this way because it would be impractical to register traded shares or other securities in each holder's name. Rather, the custodian is registered as a holder. This keeps them in an arrangement with a fiduciary responsibility to the real owners.
Special custodial banks safeguard assets for people or companies. These entities do not engage in typical commercial or retail banking; they focus on holding assets for safekeeping. This includes stocks, commodities, bonds, currency, and precious metals.
These types of companies also help make certain types of transactions. These include forex, settlements for security or currency buying and selling, and different actions related to securities. These actions could include stock splits, bond calls, stock dividends, and business mergers.
In exchange for these services, your firm will probably withdraw a custodial fee on a regular basis. It could be quarterly or annually. These fees are usually automatically deducted from your account and reflected on your statement.
In a custodial relationship, the person that purchased the asset always remains the legal owner.
The Cost of Custodial Fees
Fees vary quite a bit. It depends on the firm you are working with and the services it offers.
Many people place their assets in the custody of their broker in a brokerage account. This is an easy, convenient option. It's handled so seamlessly that many people don't even realize they serve a different function. Unless special treatment is requested, these assets will almost always be held in a street name.
Firms do this to attract as many people as they can. It's all in the hopes of getting more trading commissions. As a result, many firms waive custody fees. You may not even notice that you're paying them; the costs are rolled into the commissions on trades.
It isn't unusual for some firms to charge minimum annual fees. This is common if you don't have a certain amount of money in your account. It's also common if you don't engage in any trades for a certain length of time; it needs to help offset the expense of servicing the account.
For instance, look at a trading platform such as Interactive Brokers (IB). Let's say a customer of the firm has less than $100,000 in an account. And it generates less than $10 in trading commissions per month. A makeup fee of the differential is applied; each account pays at least $120 per year to cover IB's costs. This includes custodial fees.
IB focuses on large, wealthy clients who want economies of scale. Customers get to choose between a fixed-rate fee schedule and a tiered fee schedule. On the tiered schedule, the commission is $0.0035 per share for U.S. stocks; it has a maximum commission rate of 1% of the trade value.
Special Types of Fees
Specialty custodians who agree to deal with nonstandard assets often charge higher fees. These assets could be hedge fund investments held in the form of LLC membership units or limited partnership units. The same goes for rarer types of self-directed retirement plans, such as a self-directed IRA or Roth IRA.
These fees can run up to thousands of dollars per year. But they can be worth it for the right investor under the right circumstances. For instance, wealthy investors who want to buy assets such as an entire apartment complex under a tax shelter may benefit from these services. It would often be impossible for them to use this unique strategy to produce so much passive income without the help of a specialist.
What It Means for Individual Investors
Custodial fees are one of the things that make up your personal expense ratio. This is along with any other fees and costs you incur while managing your portfolio. When looking at your expense ratio, be sure to look at the broader picture.
Perhaps you're dealing with specialty products and services. These could have all-inclusive costs on portfolios larger than $1 million. That focus on all-inclusive costs is important. In some situations, the fees are set up in a way so that a firm charging 1.5% is assessing lower fees than a firm that says they charge only 0.75%.
This is due to the way they treat certain cash and asset classes. You cannot look at the sticker rate alone; you must understand the total fees on your entire portfolio.
- Custodial fees are a type of fee paid to a brokerage firm for the services associated with taking care of your investments.
- Fees vary by firm and account type; they will usually be automatically deducted from your account on a regular basis.
- These fees, along with other account charges, make up your total expense ratio. This is the overall cost of your account compared to its total assets.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.